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Facing Foreclosure

The national crisis finds a home in western Montana

Just about everybody in the industry says short sales are tremendously challenging. Banks are fickle, uncommunicative and unpredictable. The process is nerve-wracking for sellers. Buyers should also be prepared for a headache. Once a prospective buyer submits a bid, they simply have to wait—often for months—to receive an answer from the mortgager. After a buyer's bid languishes with no word, it's not unusual for a lender to deem the offer inadequate and foreclose on the property anyway, says Sean Chapin, who facilitates real estate closings at First American Title Co. in Missoula.

"Expect to not hear anything for three to four to five months," Chapin says. "We've had several deals fall apart...It's kind of a vicious game."

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Though it may not be a popular take on the foreclosure crisis, Patrick Barkey, director of the University of Montana's Bureau of Business and Economic Research, sees things from the banking industry's perspective. He says from a purely economic level, one untainted by the emotions of a foreclosure or short sale, lenders don't have much of an incentive to bargain with people in financial distress.

Barkey says banks act in a completely rational manner. Most borrowers faithfully make their monthly mortgage payments. Letting individuals slide on contractual responsibilities, which is essentially what short sales and loan modifications entail, sets a risky precedent.

"If you're in economic distress and I'm the bank, and I help you out, I help you out in a way that basically relieves part of your obligation. What's to stop all the other people who are performing, who can make their payments and so forth, from not wanting the same thing?" he asks. "That's the kind of thing that makes people who make loans stay up at night."

And it's not just the people making loans who lose when borrowers default. Investors who purchased pieces of those mortgages through, for instance, hedge and mutual funds also lose when borrowers evade contractual obligations.

"I think in the foreclosure story, there seems to be a genuine belief that all the pain is on one side—and that's the person leaving the house," Barkey says. "There are actually people who own these mortgage-backed assets who are losing. They lose value when loans don't perform."

Bank of America halted foreclosure proceedings in all 50 states last month after allegations surfaced that the lender and other institutions pushed through foreclosures without fully investigating the legal validity of the documents.

Barkey knows it's easy to demonize bankers, portraying them as uncaring individuals wearing power suits and making big bucks for doing little, but it's those very investors, he believes, who will help the economy rebound.

"You know, it's the same thing about Wall Street, Wall Street versus Main Street, all this sort of thing," Barkey says. "You've got to have both. That's where capital comes from. It's a collection of people who buy into ideas and help them grow.

"The problem for me goes way beyond evicted households," Barkey continues. "Evicted households, unfortunately, I hate to say it, but it has to happen. If you have something you can't afford, if you made a commitment that you can't honor, something's got to give."

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Scott doesn't buy it. She says it's easy for someone who has a job and no fear of losing everything they've worked for to simply write off her house as a faceless asset, a tool to generate capital. Why should banks be bailed out, she asks, when individuals struggling to maintain something so basic as a roof to sleep under are left to fend for themselves?

"We not only had to give them a bunch of money so they didn't fail, but they're making a bunch of money," she says. "Somewhere along the line, they need to take responsibility for their own gambles."

That said, Scott recently received encouraging news. When she arrived home on Oct. 11, a Fed Ex package was waiting. Inside the package, she found a contract detailing new terms for her home loan. It was the modification package she's been pushing for since last year.

The bank has agreed to let her tack outstanding charges, now totaling $20,000, onto the tail end of the loan, which spans a 40-year term, rather than the typical 30. The bank is offering a 2 percent interest rate for five years, when the rate will increase to 6.25 percent.

"It's a sweet deal," Scott says.

When contacted for comment, Bank of America confirmed in a written statement that it has agreed to Scott's modification.

Scott, however, is not ready to call it a done deal. While the news sounds encouraging, she hasn't yet received the signed contract back from Bank of America. That leaves her worried the deal could still fall apart.

As she waits, Scott says she'll continue trying to stay afloat, working as an independent bookkeeper, as an employee in an embroidery shop and as a youth director at Holy Spirit Episcopal Church. Every day there's no word back from Bank of America, she says the pain in her neck persists, just as it has since the whole saga began.

"It's still there," she says, "because I still don't feel like I can really trust it, after what I've gone through."